China gains with local machinery

China's plastics machinery market has been a major engine of growth for the global industry for the past five years. Some would say the biggest engine for equipment makers.

Chinese plastics equipment sales grew from 34.9 billion yuan in 2008 to 49.4 billion ($7.92 billion) yuan last year, as companies around the world targeted China to help them through the global recession.

But there are now signs that China is becoming a much tougher place for foreign imports. It's an important change in the global market, and could spell trouble if firms are too dependent there.

First, Chinese imports of injection molding machines hit a high of 6.2 billion yuan in 2010, but have dropped steadily since then, to 5.4 billion yuan last year.

Meanwhile, exports of Chinese-made injection presses have been rising, from 3.9 billion yuan in 2010 to 5.7 billion yuan last year.

Second, at the same time that those foreign injection press exports to China are down, domestically made machinery has also been capturing a much bigger share of the local market, according to data from the Beijing-based China Plastics Machinery Industry Association.

But by last year, the situation had changed dramatically: Foreign-made machinery was only 27 percent of the market, while locally made machines had a 73 percent share.

The big change happened in 2009, when industry executives said the global financial crisis forced a lot of belt tightening in capital investments among plastics processing factories in China.

"In 2009, when the crisis comes and the consumption goes suddenly down, people were recognizing there is a local supplier, why not try it," said Helmar Franz, executive director of China's largest injection press maker, Haitian International Holdings Ltd. "The interesting question would be, after the crisis is over, would they return to their original supplier. They didn't."

"This was a turning point in the Chinese plastics [machin-

ery] consumption," he said. "Most local suppliers suddenly realized, this was the chance taken by the crisis. The Chinese could present themselves as equally positioned."

First, foreign machinery companies increasingly set up their own factories in China, to be closer to the market and make something more in line with the cost needs in China.

That suggests that foreign companies have much more influence in the market than the relatively low 27 percent import figure suggests, since it's still really foreign technology that's at the core of the machine. It's just now put on a made-in-China (or assembled-in-China) piece of equipment.

But secondly, and here's the counterpoint to that, the Chinese equipment itself is improving its quality and becoming more competitive globally. That's a point that both foreign and Chinese-owned companies have made with me.

To offer one example, it's something I heard from a few South Korean companies at the recent Koplas show in Seoul, where Chinese press makers came in much larger numbers than before.

China's overall plastics machinery market last year was down 3.5 percent, or 1.8 billion yuan, to 49.4 billion yuan.

More than half that drop came in the imported equipment, though, and some foreign machinery groups seem to be acknowledging that China is becoming a less attractive export destination.

In releasing the 2012 financial results for the German plastics and rubber machinery industry, the Frankfurt, Germany-based VDMA engineering trade group pointed to rising interest in other markets in Asia.

"Southeast Asia, Thailand and Indonesia, in particular, are conspicuous for their high levels of growth, whereas sales to China and India are on the decline," said Ulrich Reifenhäuser, chairman of the VDMA Plastics and Rubber Machinery Association, in a statement.

There's one other illuminating look via the statistics. An analysis presented by Haitian in March, using Chinese, German and other data, said that between 2007 and 2011, China supplanted Germany as the single-largest manufacturing location of plastics and rubber machinery.

In 2007 Germany was tops, with 24.7 percent of the global market, and China second, with 15.9 percent. By 2011, they had flipped dramatically: China had 30.5 percent, Germany 22 percent.

Italy, the United States and Japan, ranking third, fourth and fifth, all saw their market share decline as well.

No one is writing a eulogy for machinery makers in those countries, though. They clearly have advantages in technology and in their skilled workforce.

For example, Austria's Engel Group, the world's largest injection press maker, said recently that China remains its largest Asian market. It added that, even as China's rapid economic growth has slowed, demand for high-technology models continues to grow as manufacturers look to offset rapidly rising wages.

But taken together, the figures do illustrate the sizable shift underway.

They suggest that — even with all the concern about the rising costs in China hurting that country's competitiveness at lower-end manufacturing — in plastics, China is moving up the manufacturing ladder from low-cost labor to making machinery it can now sell to the next low-cost countries.

As we look to the future, some executives also feel there could be a clustering effect that provides further momentum for China.

As those already-existing regional clusters develop further, around Ningbo, or the Shanghai-Suzhou or Pearl River Delta corridors, one question is whether that will that feed more development and more local innovation, creating centers that over time rival the top spots globally for this kind of capital equipment.

Only time will tell. Crystal ball gazing is at best difficult for experts, and at worst nearly impossible for journalists like me.

Japan certainly looked invincible from a manufacturing point of view 20 years ago, and that got a lot of ink at the time. And China has its own challenges, like depending too much on exports and infrastructure spending to drive growth.

But the last five years have brought some changes, and we can probably count on the next five years bringing some equally big ones.